The Impact of a Dynamic Generic Drug Market

Monday, November 30, 2015

Donald J. Dietz, RPh, MS, and Fred Hamilin

Recent fluctuations in prices of generic drugs have caught the attention of many in the healthcare industry and raised questions about coverage and reimbursement.

Understanding the “why” and “how” behind generic drug costs can help professionals better understand and navigate these changes:

  • Manufacturing expenses are lower because generics are copies of brand name drugs that have already been researched and introduced to the market, significantly lowering development expenses.
  • Acquisition costs tend to be low. Lower development expense makes it easier for many generic manufacturers to supply products, resulting in high product volume.
  • Prices increase with fewer manufacturers. According to studies, as long as four to five generic suppliers are competing at one time, it keeps costs from rising. If only two manufacturers are competing, prices rise.
  • Payer reimbursement adjustments can lag when prices increase unexpectedly. In those cases, pharmacies can experience acquisition costs that exceed reimbursement rates, resulting in lower margins.

Depending on where a generic drug is in its lifecycle, pharmacies have come to expect an acquisition cost savings of anywhere from 30% to 70% when compared to the brand drug. Discounted generics have become a staple for many pharmacies in terms of attracting business over the past decade. Similarly, patients have come to expect nominal co-pays on generics and may seek out discounted generic alternatives to brands when filling prescriptions.

In a perfect world, drug price changes would not affect pharmacy gross profits if payer reimbursement rates moved in tandem with market changes. Unfortunately, the lag in payer response to sudden price increases in the market can cause pharmacies to realize reduced profits or to lose money on prescriptions.

While this lag creates difficulties for pharmacies, sudden increases and decreases in generic drug prices also make it difficult for payers to set an appropriate Maximum Allowable Cost (MAC). For example, if one generic manufacturer leaves the market, payers may want to wait to see if others follow suit before increasing MAC prices.

What pharmacies need to know

In order to meet financial goals and respond appropriately to this dynamic market situation, pharmacies need to keep these points in mind:

  1. Focus on both brand and generic sales -- The gross margin for generics is now realized on a smaller scale, and the net profit margin can be similar for both brands and generics.
  2. Monitor inventory turns -- If you uphold the National Community Pharmacy Association’s (NCPA) reported annual average rate of 12.6 with inventory turning over approximately every 29 days, there should be a month of inventory to protect your pharmacy against a MAC adjustment lag.

Generics are no longer a dependable deflationary market, but opportunity still exists. Pharmacies should expect prices to continue to fluctuate based on current market trends, and payers will need to adjust reimbursement more quickly to protect pharmacies from unsustainable losses.

Donald J. Dietz, RPh, MS, and Fred Hamilin are vice president and director of business development, respectively, of Pharmacy Healthcare Solutions, Inc. (PHSI). Both have several decades experience in pharmacy and PBM business with expertise in generic pharmaceutical pricing issues.

Want to learn more about this topic? Check out the RxPerts Academy webinar on featuring these experts:

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